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Urgent Stock Market Message

Monetization of U.S. Treasury Bonds In Isolation

Interest-Rates / Quantitative Easing Aug 20, 2009 - 12:43 PM GMT

By: Jim_Willie_CB


Best Financial Markets Analysis ArticleEvery few months a chart comes along that needs almost no follow-on paragraphs to make the point of the issue. The chart provided by CIGA Eric covers several important types of US$-based bonds, their inflow and outflow, and the aggregate GrandNet. The financial data is publicly available from the USGovt TIC Reports. The messages are clear. Inflows of foreign funds are dwindling.

In the case of USAgency Mortgage Bonds and USCorp Bonds, the nation is witnessing something unprecedented, the net outflow of funds. This is outright rejection. This chart exposes the isolation problem of the USDollar in the bond world, clearly the most important market beneath the currency market. The printing press is the last option.

Ominous is a strong word. Abandonment is better, but disaster is better still. “I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar.” So wrote CIGA Eric. See the article that displays this graph and his few words on the JSMineset weblog (CLICK HERE).

The foreign creditors are moving away from the United States, plain and simple. The big bold red series shows the Grand Net US$-based bond reduction in net flow change from a high around $950 billion in early 2007 to a figure now approaching only $200 billion, thus a severe cut in net inflow. The greater alarm comes from the USCorporate Bonds in the yellow series, whose net flow change is down from a plus $600 billion high at the same time to a slight net outflow negative figure now. The USAgency Mortgage Bonds in chartreuse/mauve/pink have net flow change with peak of plus $300 billion at the same time to a net outflow of a frightening $150 billion now. Since the important peak for mortgage and corporate bonds, the USTreasurys in blue series have recovered from a $200 billion net positive inflow to a $400 billion net inflow. However, one should suspect that the USFed is purchasing the USTreasurys from convenient accounts bearing foreign names, using American funds, and laced with sinister motives founded in deception. Foreigners in all likelihood are not the primary purchasers.

The foreign purchase declines from peak levels two years ago have fallen off a cliff, much like that of Acapulco. The image of a brave diver is also quite vivid, as risk is determined by the shifting water (liquidity) level. The United States credit markets are losing their legitimate liquidity and increasingly are turning to the desperate reckless alternative, namely the dreaded MONETIZATION. Mortgages in the United States must maintain funding from the USFed and USGovt by direct purchase, no longer a market action. There are mainly sellers. The corporations in the US must maintain funding from a more desperate means. See the Samurai Bonds offered in Japanese Yen denomination, the ones growing in popularity. My view is that a good slice of USGovt Treasury Bonds will be denominated in foreign currency routinely within one year, if the US$ system survives in its current form that long. The conclusion is clear from the messages, both graphic and statistical, that THE US$-BASED BONDS OF ALL TYPES WILL RELY ON DIRECT MONETIZATION VERY SOON OR IMMEDIATELY.

Acapulco Cliff Diver


Monetization of USTreasurys is occurring in a profound blatant fashion. Such action infuriates the Chinese creditors, while at the same time creates a huge rift between the US Federal Reserve and the USDept Treasury. The rift is political and will come to a head when Chairman Bernanke is due for renewal of his post in a few months. China exerts its constant pressure on the USFed to end the Quantitative Easing efforts. Like doctors, they wish to apply a tourniquet to a gaping leg wound that bleeds a red river onto the pavement. The term is a funny euphemism, a sophisticated economist term for Heavy Duty Money Printing that results in destruction of a currency if not kept under control. The USDollar stewards are NOT demonstrating control, discipline, or even anything remotely resembling honesty or integrity. The USDept Treasury wants to continue funding the federal deficit, and for yucks, add any and every conceivable new program onto the books while the federal insolvent bankruptcy makes marginal additions not so noticeable.

The USFed engages in almost immediately permanent operations to snag the primary dealer USTreasurys gatherings bid at auction, for a simple shell game shuffle. The USFed engages in a sneakier but still obvious hidden bidder game with foreign central banks. They use USDollar Swap Facilities (with gargantuan funds) and bid heavily on the USTreasurys, evidence being the ‘Indirect Bid’ component. If not for the USFed buying most of the USTreasurys issued, the long-term interest rates would be rising quickly and with alarm. If not for the USFed heavy buying, the USDollar would be doing a swan dive off a cliff into rough waters. As has been claimed in past work, the USGovt stewards of the wrecked buck can save the USTreasury or save the USDollar, but not both. Their monetization efforts here and abroad indicate a clear intention to save the USTreasury Bond. They put the USDollar at grave risk. The Weimar Territory lies directly ahead!


The USDollar remains firmly stuck at the cliff’s edge. It cannot recover, as the 80 level offers stiff resistance. The Powerz seem to prevent the breakdown but they cannot engineer a rally for recovery with any gusto. Two notable technical factors bear importance. The downtrendline is becoming clear, which worked to make the 80 level more stubborn. Also, the moving average crossover that occurred in early June still casts a dark cloud over the entire USDollar trading. The US$ DX index is stuck in a bear market, unable to bounce, and now is running out of time. Resolution is demanded. A key point must be mentioned. We are fast in the land of the non-linear, where discontinuous events occur, and disjointed price movements are highly likely. The ground from under the currency market is shifting in an unstable fashion. See the British Pound Sterling in the last week. It has jumped up and fallen down by 200 basis points in several days. Even the Euro has shown unstable movement. That is akin to a hanging lamp in your study, or a displayed chandelier in the living room, and see it shift to and fro in grand swings. Something big is coming and soon. All billboards scream it!!

The evidence of futility in a USDollar potential to recover is shown in the same daily chart, but with only three months shown. Faced with a likely breakdown, the USGovt engineered a small GDP decline two weeks ago in the statistical laboratories. A minus 0.1% advance on the Q2 economic growth sounded great at the time, if one believes it. On an annual basis, viewing Q2 versus last year’s second quarter, nothing has improved. The sequential approach used by the USGovt stat-rats lends itself well to finagles and gimmicks. They look at Q2 versus Q1, load in the nonsensical adjustments, and multiply by four in a laughable indefensible exercise. Just a week later, the European Union announced its GDP for Q2 was also a minus 0.1%, only to sidetrack the wondrous USDollar bounce. So the USEconomy is not going to lead the world out of the recession. Anyone who thinks that is a patented moron. The site of the implosion damage is never the foundation for the next recovery. Ground Zero was Wall Street, lest one forget. The Chinese financial market is actually leading the US market on directional turns. Sadly and tragically, the USDollar is stuck in mud, running out of time, awaiting a meat cleaver by foreign creditors. The August Hat Trick Letter report on gold & currency is to be posted this weekend. It contains some very surprising information on the cash intermediary currency market. A deep USDollar devaluation comes!!!



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by Jim Willie CB
Editor of the “HAT TRICK LETTER”
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Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at

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